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Kurdistan out of Iraqi control over oil

Iraqi Kurdistan is the star attraction for western oil companies. It has the largest reserves of the world’s best oil in terms of quality and cost of exploration. Recently Total of France has stepped in the picture by buying a large stake in two exploration blocks in Kurdistan. Iraqis are fuming at their loss of control over the most important economic zone in Iraq.

Autonomous since 1991, Kurdistan has its own government and armed forces, but still relies on the central government for its budget drawn from the OPEC nation’s oil revenues.

Kurdish officials accuse Iraqi Prime Minister Nuri al-Maliki, a Shi’ite, of amassing power at the expense of Sunni and Kurdish minorities, but Baghdad says Kurdistan is breaking with the constitution by signing deals with foreign companies.

Increasingly chafing against Baghdad’s authority, Kurdistan is testing the central government with proposals for a more independent energy policy.

Now one of the most prosperous parts of Iraq, Kurdistan has been isolated from the violence and sectarian strife that still beset the rest of the country.

French oil major Total has bought a 35 percent stake in two exploration blocks in Iraq’s Kurdistan region, drawing an angry response from the Iraqi government which has tried to bar companies from dealing directly with the semi-autonomous region.

Total, which is following U.S. rivals into the area, was warned by Baghdad on Tuesday it faced “severe” consequences for buying the stakes in the Harir and Safen blocks from U.S. peer Marathon Oil without the government’s consent.

“We will punish companies who sign deals without the approval of the central government and the oil ministry,” said Faisal Abdullah, a spokesman for Iraq’s Deputy Prime Minister for Energy Hussain al-Shahristani.

“Unless Total reviews the deals, it will face severe consequences… Total will be blacklisted for violating Iraqi law,” he said without giving further details.

Total, seeking to tap Iraqi Kurdistan’s vast oil reserves and bank on more attractive terms than in the south of the country, ignored earlier veiled threats to refrain from deals with the Kurdish region.

Total’s Chief Executive Christophe de Margerie had signalled in February that the group was considering investments in Kurdistan since contractual conditions there were better than in the rest of Iraq where it and its partners began production at the south-eastern Halfaya field in June.

Both fields in the Marathon Oil deal are located south of Iraq’s border with Turkey. Seismic exploration of both fields is expected to be completed by September.

The first exploration well on the Harir field was drilled on Monday and the first exploration well on the Safen field will be drilled next year, Marathon Oil said.

“These are enormous blocks. There’s rarely a disappointment in exploration in Kurdistan,” said a Paris-based analyst who declined to be named.

“They have a permit in the south of Iraq and at the worst the government could renegotiate concessions or withdraw the license. But these wells are not very profitable,” he said.

He cited the exit of Statoil and Exxon as evidence of their disappointment with the wells and the terms that Baghdad has set for oil majors to operate them.

He said the challenge for Total and its peers doing business in Kurdistan would be to transport the product, as Baghdad could block the use of its pipelines in the south.

The deal will further strain ties between Baghdad and the KRG which is caught up in a long-running political feud over oil rights and disputed territories along its hazy internal border.

Exxon Mobil became the first oil major to move into the northern region of Iraq in mid-October when it signed a deal with the KRG. Norway’s Statoil is also looking closely at KRG exploration deals, industry sources have said.

The Iraqi central government in Baghdad considers that any oil contracts signed with Kurdistan are illegal and it blacklisted Chevron Corp, which followed Exxon into Kurdistan this month, over such a deal.